Tell me a story: Creditor seeks client’s D&O coverage

Tell me a story: Creditor seeks client’s D&O coverage

Tell me a story: Creditor seeks client’s D&O coverage

Winbrook Communication Services, Inc., filed suit against DeSales Group and William York (collectively, DSG), alleging that York had made a series of negligent misrepresentations concerning DSG’s financial condition that induced Winbrook to continue to work on the development of a children’s storybook series and associated promotional items. The series never went to market and Winbrook sued, seeking compensation for work performed.

In advance of suit, DSG gave notice of Winbrook’s claims to its directors and officers liability insurer, United States Liability Insurance Company (USLIC). USLIC replied that the policy would not cover the claims. After suit was filed, Winbrook notified USLIC of the suit and of a pending motion for entry of default. DSG reportedly told USLIC that it did not intend to defend. USLIC again denied coverage, citing two reasons: (1) the claims were for the failure to pay contractual debts, and such claims did not allege a “wrongful act” as required for coverage under the insuring agreements, and (2) the claims were excluded by exclusion C, the so-called “personal profit exclusion.”

USLIC declined to defend under a reservation of rights and did not seek declaratory relief while the underlying liability action was pending. DSG defaulted. After a hearing, a judge of the Superior Court adopted proposed findings outlining the claimed misrepresentations and Winbrook’s calculation of losses. The judge then entered a default judgment in favor of Winbrook in the amount of $597,633.25 plus interest.

With judgment in hand, Winbrook brought an action against USLIC in December 2011, seeking a declaratory judgment that USLIC was obligated to pay the judgment obtained by Winbrook against DSG, damages for breach of contract as a third-party beneficiary of the insurance contract, and damages for unjust enrichment and for violation of a relevant state statute.

Winbrook moved for summary judgment and also moved for a protective order to bar discovery by USLIC. A different Superior Court judge concluded that the existence of a claim for misrepresentation was conclusively established in the previous action and that the claim fell within the coverage provisions of the policy. She granted the motion for a protective order, reasoning that the sole purpose of USLIC’s discovery requests was to “marshal additional evidence in support of its position that the insureds are properly liable under a theory of breach of contract, not negligent misrepresentation,” and that because that claim was barred by the default, discovery was not warranted. Finally she determined that there was a genuine dispute of material fact as to the applicability of exclusion C and denied summary judgment.

The summary judgment order was silent as to discovery regarding exclusion C, and neither party sought discovery regarding exclusion C. Rather, Winbrook filed a request for reconsideration of the summary judgment as to the applicability of exclusion C, and USLIC filed a cross motion for summary judgment. Winbrook provided additional affidavits in support of the motion for reconsideration and supplied the record supporting the default judgment. In opposing Winbrook’s motion to reconsider and in supporting its own cross motion for summary judgment, USLIC relied exclusively on materials submitted by Winbrook.

On the basis of the record as supplemented, a third judge of the Superior Court ruled that coverage was barred by exclusion C because the insureds had reaped a gain “in fact,” that is, an advantage or an opportunity to profit. The third judge concluded that the insured had secured an advantage or opportunity, to wit, an extension of credit from Winbrook by persuading Winbrook to work without payment. As a result, the judge ordered the entry of summary judgment in favor of USLIC. Winbrook appealed.

On summary judgment, the appellate court noted, the burden was on USLIC to demonstrate that no genuine dispute of fact existed with respect to exclusion C. This meant that USLIC was required to show not only that the exclusion applied as a matter of law, but also that the facts demonstrated that DSG received a gain that fell within the exclusion. The court held that USLIC failed to satisfy that burden where it produced no evidence of what advantage Winbrook’s advances of services created. There was no showing of actual personal gain. There was no showing of undisputed fact that money, goods, or services actually were delivered to which DSG was not legally entitled after the misrepresentations took place.

With respect to its motion for summary judgment, the court noted, Winbrook had the burden of demonstrating the absence of a genuine dispute as to whether DSG had not received a gain or advantage. Winbrook produced some evidence in support of its motion for summary judgment showing that no advantage accrued to DSG and that exclusion C was inapplicable as a matter of law, based on the affidavit from DSG’s principal that stated no product was ever delivered to DSG. However, a review of the documents substantiating Winbrook’s claims for damages included bills for services rendered, e.g., several months of employment as “VP of Product Development.” There were also bills for goods produced for trade shows on DSG’s behalf. Other bills included copies of artist’s drawings of prototype characters, illustrations, and sample pages of written materials, such as a child’s newspaper. These invoices, the court said, raised a question of material fact whether DSG received goods or services that created an opportunity for gain or advantage.

The court held that summary judgment was not appropriate at this juncture, as genuine issues of material fact remained regarding the applicability of exclusion C, and neither party was entitled to judgment as matter of law. The judgment was vacated, and the matter was remanded to the Superior Court for further proceedings.